On the topic of paying off your mortgage early

[Anachron]

There has been numerous threads lately related to this topic, which kind of makes sense seeing how the age of the average miscer has to be above 30...

I was disappointed to see a lot of popular misconceptions posted regarding this subject.

I was playing around with a spreadsheet to see if I was mistaken, and figured I would post up an example, going to use green numbers for paying off mortgage early, blue for investing the funds instead.

1. Person A buys property worth $600K, puts $100K down, and gets a 30 year fixed mortgage @ 7%. Person A decides to budget $4K per month for the mortgage, and decides to sink any excess over his normal payment into the principal. When he finishes paying off the mortgage, that means he is going to be sinking $4K/month into an investment account, since there is no more mortgage to sink it into.

2. Person B buys property worth $600K, puts $100K down, and gets a 30 year fixed mortgage @ 7%. Person B decides to budget $4K per month for the mortgage, and decides to sink any excess over his normal payment into an investment account.

We are going to assume a conservative 7.5% average investment return in both cases. For simplicity' sake, we are going to use property appreciation of 0% ( but it's moot since it would be the same for comparison anyway ).

Let's see how this strategy works out...

Spoiler!

Year 10 :

Person A has a net worth of $287.508.54, while Person B has $290,771.95 - Very much comparable, even though Person A "saved thousands in interest".

Spoiler!

Year 15 :

Person A has $443,375.82, Person B has $452,905.66 - The guy who is NOT paying off his mortgage is even further ahead.

Spoiler!

Year 20 :

Person A has $662,697.45, Person B has $686,430.34 - The guy who decided to pay off his mortgage early has now been contributing $4K/month for over a year now, but is still behind.

Spoiler!

Year 30 :

Person A has $1,444,142.42, Person B has $1,507,487.68 - The guy who decided to pay off his mortgage early has been contributing $4K/month for over ten years not, and is falling further and further behind.

Lesson for the day?

Never underestimate the power of compound interest, and learn how amortization works.



Edit:

Spoiler!

Please note that the rate used for investment return is historically low, and the mortgage rate is historically high.

Please also note that if person B is putting the excess funds into a 401K, he can roll all of the tax benefits back into the investment account if he desires - this was left alone for the sake of clarify.

[atgbrahsrs]

in for later

[Anachron]

Oh and if the mortgage rate would be 5% in the examples in the OP?

The guy who paid off his mortgage early ends up over $400K behind by year 30, with all other parameters kept the same.

[atgbrahsrs]

Oh and if the mortgage rate would be 5% in the examples in the OP?

The guy who paid off his mortgage early ends up over $400K behind by year 30, with all other parameters kept the same.

foookeen jewish banks and mortgage instruments

[Polaris]

.

[Omnivium]

You're comparing 7% to 7.5%, of course there won't be a huge difference with those numbers. Now do one where the mortgage interest rate is 5% and the investing return is 10%

[Anachron]

You're comparing 7% to 7.5%, of course there won't be a huge difference with those numbers. Now do one where the mortgage interest rate is 5% and the investing return is 10%

That's the point...

I made it completely nonsensical to skew it in favour of paying off the mortgage early, and it still doesn't make any financial sense to dump the money into the mortgage.

I've used a mere 0.5% difference.

But let's look at Year 30 of your example...

Person A has $$2,311,775.05, Person B has $3,574,557.72 - this is even though Person A was dumping $4K/month into the investment account for over 15 years by this point!

Brutal.

[atgbrahsrs]

That's the point...

I made it completely nonsensical to skew it in favour of paying off the mortgage early, and it still doesn't make any financial sense to dump the money into the mortgage.

I've used a mere 0.5% difference.

But let's look at Year 30 of your example...

Person A has $1,591,627.90, Person B has $3,574,557.72

Brutal.

isnt this why they even do penalties for giving them money early?

[Godfrd824]

You didn't factor in that you can use the ymca pool everyday for only $36 a month. You also didn't factor that a family of three can share a McDonald's value meal at$12.50, 3 times a week.

[Anachron]

You didn't factor in that you can use the ymca pool everyday for only $36 a month. You also didn't factor that a family of three can share a McDonald's value meal at$12.50, 3 times a week.

I am pretty sure I lost that part of the audience when I used the word "amortization".

[Anachron]

Very interesting how a lot of people seem to be avoiding this thread.

[redwine91]

Fuark op. Good stuff

[DuracellBunny]

Very interesting how a lot of people seem to be avoiding this thread.

IIRC it was 4-5 people. That doesn't count as a lot. They are loud, but few in number.

[Anachron]

IIRC it was 4-5 people. That doesn't count as a lot. They are loud, but few in number.

Touche.

[24HrParking]

I will never pay off my investment property. It's an interest only loan. It'll sit on the loan size forever.

Brb the house is growing about ~$90K a year.

Interest payments are about $10k a year in repayments + $1K for insurance per year and $1K in rates per year.

Wait roughly 10 years and see if I want to sell or wait it out a bit longer. Basically my retirement fund.

[atgbrahsrs]

Very interesting how a lot of people seem to be avoiding this thread.

Who dafuq questioned this?

As soon as I heard "penalty for paying off early? for the first time 2 years ago... I knew it has to do with how much money they make off interest.

I have only seen on the misc people bashing having a mortgage at all, completely gaslighting on equity of the house

[r32gojirra]

Very interesting how a lot of people seem to be avoiding this thread.

I’m not avoiding it so much as ignoring it because it’s trivial

But kudos to you for stepping it out, I’m genuinely amazed there are people that don’t get this

[Anachron]

I’m not avoiding it so much as ignoring it because it’s trivial

But kudos to you for stepping it out, I’m genuinely amazed there are people that don’t get this

All good brah, not aimed at you at all.

[nutsy54]

I paid off my mortgage in 4 1/2 years. I now pour half my income into investing, and a sizable chunk into the Vacation Fund. Net worth is at $1.5 million... It was $548K when I paid off the mortgage less than six years ago.

Never going back into debt.
*The early payoff saved me $103,820 on interest. I ended up paying only $19,539.

[r32gojirra]

I paid off my mortgage in 4 1/2 years. I now pour half my income into investing, and a sizable chunk into the Vacation Fund. Net worth is at $1.5 million... It was $548K when I paid off the mortgage less than six years ago.

Never going back into debt.

Now run the numbers and see how far ahead you could have been

[Anachron]

I paid off my mortgage in 4 1/2 years. I now pour half my income into investing, and a sizable chunk into the Vacation Fund. Net worth at $1.5 million... It was $548K when I paid off the mortgage less than six years ago.

Never going back into debt.

I'll run the numbers for you if you give me the parameters - chances are your net worth would be a lot higher if you didn't pay off your mortgage.

I just need :

Purchase price, mortgage amount and interest rate, and monthly amount "poured into investing".

[AshWar]

You forgot to factor in the financial assistance that misc landchads received from their mommy and daddy

[Anachron]

You forgot to factor in the financial assistance that misc landchads received from their mommy and daddy

Just LOL @ beavercels and their inability to get a 30 year fixed rate srs.

[nutsy54]

Now run the numbers and see how far ahead you could have been

Here's the problem with that claim - nobody can predict stock market returns in the short term. You need to justify debt for decades to achieve long-term gains, so why not do that with even more investing and no mortgage payment?

[Anachron]

Here's the problem with that claim - nobody can predict stock market returns in the short term. You need to justify debt for decades to achieve long-term gains, so why not do that with even more investing and no mortgage payment?

My offer still stands, just need the inputs.

[NextPound]

I have run it out myself a bunch of times. It honestly does not really make a difference either way once you take into cap gains taxes, but yes, you will come out marginally ahead if you invest over pay off, but it really depends on rate. My 2.75% rate makes it a no brainer.

[r32gojirra]

You forgot to factor in the financial assistance that misc landchads received from their mommy and daddy

Age:44

Can i interest you in some collapse of the Soviet Union

[r32gojirra]

Here's the problem with that claim - nobody can predict stock market returns in the short term. You need to justify debt for decades to achieve long-term gains, so why not do that with even more investing and no mortgage payment?

Fortunately, the short term returns are irrelevant

[Anachron]

I have run it out myself a bunch of times. It honestly does not really make a difference either way once you take into cap gains taxes, but yes, you will come out marginally ahead if you invest over pay off, but it really depends on rate. My 2.75% rate makes it a no brainer.

It doesn't make much difference if the rate of return is close to the rate of the mortgage, as you said.

That doesn't hold true in the vast majority of cases (IIRC there was someone who was bragging about paying of a 2.xx% mortgage in the past week ).

[MrSchons]

What if I pay my mortgage off in 12-14 years compared to 30?